Answering to investors’ growing demand for robust and comprehensive ESG metrics, the S&P Global ESG Scores were made accessible to the global investment community on 18th May 2020 – in the midst of a global crisis that has seen large outflows from mainstream funds and inflows into sustainable investments as global sustainability indices have outperformed traditional market benchmarks.
What can we learn from the longest-serving global sustainability benchmarks?
Since its pioneering launch in 1999, the Dow Jones Sustainability Index (DJSI) has achieved iconic status as a global standard for measuring and advancing corporate ESG performance. It was the first global index to track the ESG credentials of publicly listed companies and to this day continues to attract record engagement from companies seeking to measure and improve their performance through its bedrock, the SAM Corporate Sustainability Assessment (CSA).
The long heritage of the DJSI provides an important history lesson on the evolution of sustainable investing rewards. For the first 15 years the DJSI World was an index for investors with a true conviction to sustainability, rather than the ones seeking strong outperformance against a benchmark. However, over the last five and three year time horizons, the DJSI World has outperformed the S&P Global BMI by 1.08% and 1.78%, suggesting that sustainable companies are increasingly being rewarded in the market. Over the last year, the DJSI World has outperformed the BMI by 4.48%[1].
The current pandemic seems to confirm what ESG pioneers have long propagated: that companies with superior ESG performance can be expected to be better prepared to weather such crises, and to operate in the post-crisis world, because they are better-managed companies, with stronger competitive advantages, healthier balance sheets, and a better social license to operate than their non-ESG peers.
The S&P Global ESG Scores identify such companies on the basis of the results of the SAM CSA, developed in 1999 to assess the ESG factors expected to have an impact on a company’s growth, profitability, capital efficiency and risk exposure.
Figure 1: Dow Jones Sustainability World Index vs. S&P Global BMI - 3 Year
The launch date of the S&P Global BMI (USD) was December 31, 1992.The launch date of the Dow Jones Sustainability World Index was September 8, 1999. All information presented prior to the index launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Past performance is not an indication or guarantee of future results. Please see the Performance Disclosure at http://www.spindices.com/regulatory-affairs-disclaimers/ for more information regarding the inherent limitations associated with back-tested performance.
Setting the bar on ESG intelligence
In contrast to a lot of other ESG frameworks that rely on purely academic or theoretical frameworks to define what is material, the approach of S&P Global ESG Scores is to find the most financially material issues in each industry drawing on more than two decades of engaging with thousands of companies through the CSA, and based on a methodology that was built by investment practitioners with investment processes in mind.
In-depth scoring informed by millions of data points allows for a precise differentiation of companies, and the well-balanced methodology combines disclosures and forward-looking metrics, with all analytical processes independently assured.
In SustainaAbility’s Rate the Raters 2019 report, companies rated the CSA as the most useful ESG assessment thanks to its high level of transparency, its sector-specific view of material ESG issues, and its forward-looking incorporation of emerging sustainability risks and opportunities[2]. In the 2020 report, which looked at the investor perspective, the CSA came out top among the highest-quality ratings and was cited as a “strong signal of sustainability.”[3]
Pinpointing resilience in the transition to a sustainable future
The COVID-19 pandemic is an existential stress test that mercilessly reveals companies’ strengths and weaknesses. As ESG has been lifted to the top of corporate, investor and policy agendas in recent years, more investors may have understood that ESG analysis can identify sources of company resilience that go undetected in traditional financial analysis, showing which companies are better prepared for future risks and fat tail events. Coupled with sustainable indices’ strengthening performance, this realization may have driven investors into sustainable funds. When COVID-19 infected markets, sustainable investments offered a chance to bolster portfolios’ immunity.
As the pandemic and its fallout are altering society’s values, COVID-19 may prove to be a major inflection point for ESG investing, as investors scrutinize companies’ responses to the pandemic and vulnerability to systemic risks resulting from weaknesses such as poor human capital and corporate governance, inflexible processes or over-extended supply chains and balance sheets.
Footnotes
[1] As of June 17, 2020
[2] Wong, Christina, et al. Rate the Raters 2019: Expert Survey Results. SustainAbility, an ERM Group company, 2019, pp. 1–39
[3] Wong, Christina, and Erika Petry. Rate the Raters 2020: Investor Survey and Interview Results. SustainAbility, an ERM Group company, 2020, pp. 1–54